Official data suggests almost one in ten people entitled to draw their state pension do not do so immediately, while 14,000 pensioners have suspended their payouts. In return, they receive a higher pension when they do make a claim for the first time or go back to claiming.
Pension experts had expected the number of people deferring their state pension to fall sharply after a change in the rules in 2016 made it less attractive to do so. Before April 2016, you got a 10.4% increase in your pension for every year you delayed taking it, but this has now come down to 5.8%. The change means you need to live for 17 years once you start taking the money to get more overall than you would have done by claiming it straight away; previously the break-even point came after only nine years or so.
However, there’s another complication to think about. The number of people working on past retirement age is now at a record high. For many of these people, a state pension of around £9,000 a year on top of their earnings pushes them into a higher tax bracket. By deferring their pension until they stop working, they’ll pay less marginal tax today – and may pay no tax at all on their state benefits when they do start claiming.
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The maths will depend on your circumstances, but if you’re working, the beneficial effect of lower taxes could reduce your breakeven point from deferring your state pension. It’s certainly worth considering.
David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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